Question
Answer questions 11 and 12 based on the following problem. Problem: Suppose that a U.S. MNC has a payable of EUR 10,000 due in three
Answer questions 11 and 12 based on the following problem.
Problem: Suppose that a U.S. MNC has a payable of EUR 10,000 due in three months. The current spot rate of EUR is USD 1.2000, the current 3-month forward rate of EUR is USD 1.1760, which is above the MNCs own expected future spot rate of USD 1.1755. The current Americanstyle call option due in three months is USD 1.1750 and the current American-style put option due in three months is USD 1.1770. The strike price for both the call and put options is USD 1.1765, and the premium of each option is USD 0.0015 per unit. The future spot rate turns out to be USD 1.1800 on the due date. All other possible transaction costs are ignored.
11. Suppose that the MNC decides to purchase an American-style call option to hedge the future payable due in three months. Then the premium will total _______.
A) 15 US dollars.
B) 15 euros
C) 25 US dollars
D) 25 euros
12. If the MNC purchases __________ for the future EUR-denominated payable, it will need to prepare a financial fund of _________ for the EUR payment on the due date. Note that any option premium must be paid at the beginning of the decision horizon.
A) a call option; USD 11,750
B) a forward-purchase contract; USD 11,760
C) a put option; USD 11,800
D) all of the above
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